Investor competition and project risk in Venture Capital investments

The Influence of Local Economic Conditions on Start-Ups and Local Open Innovation System

“…Such actions can stifle entrepreneurship and innovation, and discourage start-up initiatives. International statistics show that many innovative ventures (often also those supported by public funds) become the only an attractive form of increasing investors' capital without engaging their own human resources and the intellectual capital they represent [69][70][71][72]. Importantly, the organizational separation of the start-up additionally limits the risk of investors in case of the collapse of the start-up.…”

Passive syndicates and risk in venture capital investments

“…As in Hirshleifer and Suh (1992) and Geronikolaou and Papachristou (2016), we pose the assumption that all types of projects have the same return which allows us to concentrate ceteris paribus on the pure effect that risk may have on the model. Return R follows distribution which is continuous, twice differentiable, with density , where and represent non‐contractible managerial efforts of E and L , respectively.…”

“…The model follows the typical structure of a VC syndicate formation in which the deal is initiated by a budget‐constrained principal investor who is subsequently joined by one or more follower VCsts (Chahine et al, 2012). The paper is related to the stream of the literature that views VC investments from the principal–agent perspective assuming two‐sided moral hazard in the sense that both the lead VCst and the entrepreneur may take non‐contractible managerial efforts that affect the project's proceeds (Casamatta, 2003; Geronikolaou & Papachristou, 2016; Kanniainen & Keuschnigg, 2003, 2004; Repullo & Suarez, 2004).…”

“…The model assumes that syndication softens competition among investors in the sense that the number of available bidders in the market is reduced by a number equal to the syndicate size. In general, competition in the VC industry will favorably affect entrepreneur's bargaining power because his outside option depends on the overall availability of funds in the market (Geronikolaou & Papachristou, 2016; Koskinen et al, 2014). In that line, syndication will reduce any investee's outside option which consequently allows for greater profits for the principal investor who can finance even riskier projects.…”

“…Most of the models in the VC literature assume risk neutrality for both VC investors and entrepreneurs. As in Geronikolaou and Papachristou (2016), this paper assumes that entrepreneurs are risk averse unlike VC investors who are risk neutral. We believe that entrepreneur's risk aversion makes our model more realistic, while VC investors' risk neutrality stems from the assumption that VCsts hold a well-diversified portfolio of investees (Reid et al, 1997).…”